June 21, 2014

AVT Natural: A Long Term View

Background:
AVT Natural established in 1925 hails from the AV Thomas group and is a strategic diversification from the traditional plantation business. The company specializes in extraction of colours and flavours from natural sources. The company's business consists off:
i) Marigold Oleoresins
ii) Spice Oleoresins and Essential Oils
iii) Value Added Teas

Products:
Marigold has traditionally been the company's main product but off late the company has diversified into decaffeinated tea and spice oleoresins segments which now contribute more than 35% of the company's revenues. The company has a presence in the eye health care segment with it's partner Kemin Human Nutrition and Health Division which has a strong presence in this market. After done by the National Eye Institute (USA), the company expects the demand for Marigold Oleoresins to boost up. It also plans to expand into a second product in the eye care segment. The company is giving increased importance to the instant tea segment whose capacity was increased in the latter half of 2013 and the company expects a significant increase in it's sales from 2014-15.Note: Kemin is one of the largest consumer of Marigold in the world and also the largest client of AVT. Kemin is en-route a phase where it targets a high growth period from 2015 post the trial results of the National Eye Institute. Post the trials, as per the results of earlier results of the trial, the use of Lutein and Zeaxanthin will increase. Marigold (Food Grade) is the richest source of both and AVT is the largest producer of Food grade Marigold.

Risk:
The segment in which the company operates is vulnerable to failure of monsoon and volatility in the prices of marigold. The company has 3 cropping areas and 3 cropping seasons and carries sufficient inventory to mitigate the risk of crop failure. This strategy ends up burdening the working capital requirements of the company. For marigold flowers, the company operates under a contract farming model where agreement with the farmer exists for rights and obligations of each party and the flower price is pre determined. The prices of marigold had rocketed in 2011-12 but the last year saw it return to normal levels due to over production in China.

Opportunities:
The company is seen as a world leader in Food grade Marigold Oleoresins, India's 2nd largest exporter in Spice Oleoresins and Essential oils and the third segment is relatively a new segment with high growth potential. Of the 3 major Marigold producing countries: India, China and Peru, the company has a production base in India and China. In the Value Added teas segment, the company is one of the few players in the world who have decaffination facilities. Players like lipton tea outsource their decaffination requirements to companies like AVT at a fixed processing fee. This business is a capital intensive and high skill requiring one and currently in Asia, there are only 3 companies who offer this facility.

Financials:
The consolidated sales of the company for the year ended 31st march, 2014 stood at Rs. 289.50 Crores up by 7.8% when compared to Rs. 267 Crores for last year. The company's sales have grown by a CAGR of 27% over the past 5 years rising from Rs. 87 Crores in 2010 to Rs. 289 Crores in 2014. The operating profit has risen from Rs 19 Crores in 2010 to Rs 67 Crores in 2014. Year on year, the company's operating profit has fallen from Rs. 78 Crores to Rs 67 Crores on account of higher marigold prices. The net profit of the company has risen from Rs 6 Crores to Rs 42 Crores in the last 5 years. The company's operating profit margins vary from 17%-30% and in 2012 the margin was as high as 39%, in 2013 it was 30% and in 2014 close to 23%. The net profit margin stood at 17.5% in 2013 and 14.5% in 2014. The standalone net profit of the company has been stuck at around Rs. 50 Crores since FY 11-12.
The reserves of the company stand at Rs 152.45 Crores for FY 13-14 against Rs. 130 Crores in FY 12-13. The debt of the company stands at around Rs. 5 Crores as on 31st March, 2014 down from Rs 32 Crores as on 31st March, 2013. The finance cost on account of lowering of debt has fallen from Rs. 5.4 Crores to Rs. 1.4 Crore. The company aims at being a "ZERO-DEBT" organisation in the future.

Valuation:
The company trades at around Rs 35 and has a paid up value of Re. 1. At the current levels and EPS of Rs. 3.36 (Standalone) the company trades at a P/E of 10.5 and Dividend Yield of 1.77%. The company has been through a phase of development with healthy margins and growth and the coming years could see all the 3 divisions perform at their maximum. With the company known to be maintaining healthy margins, this stock is a must add for your portfolio with a view of 5 years and it could, with time turn out to be a decent 20%-25% annual growth stock.